Goldman's superficial concessions on pay won't fool an angry nation

What business does America have complaining about how much bankers get paid? Surely we can't operate a free-market economy if the average person gets a say on how a company pays its workers.

If you believe that, you're absolutely right. But that's not stopping Goldman Sachs Group (GS) from bowing to pressure from pay critics. Now, if only Goldman could satisfy the American public.

Why are so many Americans so angry? Because they know that the free market -- which supposedly rewards success and punishes failure -- does not determine the fate of the biggest firms, only the small ones that can't buy influence in Washington.

For the large firms, like Goldman, there's a special, "heads I win, tails you lose" market, in which government's role is to make policies that help them profit more when times are good, and shield them from losing money when times get rough.

(Let's not forget that last fall, when Goldman was days away from big trouble, the taxpayers gave the company $10 billion in TARP funds, $12.9 billion in a credit default swap (CDS) settlement, and $52 billion in low-interest financing).

One focal point for the public's rage has been the record bonuses Wall Street intends to pay out a year after the financial collapse. Goldman has set aside $16.7 billion so far this year for bonuses -- a figure forecast to rise to $22.7 billion in bonuses by year's end, according to Reuters.

So, in its latest move to deflect some of the hostility, Goldman has announced it will pay its top 30 people in stock that can't be sold for five years and can be clawed back if there's a material restatement of Goldman's financial condition or outright illegal behavior, according to Bloomberg News.

A Good Idea, But With Devils in the Details

As someone who has been pushing since 2007 for bankers to put their pay in escrow for five years, this proposal is better than I expected because the payments are in stock rather than cash. This means that the executives are taking a risk that their stock might decline in value. Now, they will have a big financial incentive to figure out how to make their stock price rise over a five-year period. And that is good for public shareholders.

But the details of this plan leave plenty of room for game-playing. After all, Goldman claims to have 31,700 employees, but they've increased that number this year by including 3,000 part-timers and consultants, so the bonus-per-employee calculation -- which would be $717,000 (dividing $22.7 billion by 31,700) will only be 8% higher than the $661,490 per employee record Goldman set in 2007, according to Bloomberg. Take out those 3,000, and Goldman's 2009 pay averages 20% higher than in 2007.

But wait, there's more. By paying its top 30 people in stock, the other 31,670 can get cash -- so the move won't have any effect on recruiting "talent." And then there's the benefit of the deal on Goldman's financial reporting. The compensation expense for those stock bonuses doesn't begin to get reported until the shares vest in 2010. This means that Goldman's 2009 compensation expense will appear to be lower and its apparent profit will be higher.

I was speaking with a TV producer last night who was enraged by Goldman's proposal. And I think his feelings mirror those of many, many people. The Goldmans of the world will always figure out ways to outmaneuver the American public. But that doesn't mean we have to like it.